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Big Banks Face Limited Upside


NEW YORK ( TheStreet) -- We began 2013 with positive fundamentals for the bank stocks in the PHLX KBW Banking Index . Among the 24 components, four were rated strong buy including two of the "too big to fail" money center banks Bank of America (BAC) and Citigroup (C). We showed 14 buy rated names including the other two "too big to fail" banks, JP Morgan (JPM) and Wells Fargo (WFC). There were only six rated hold.

In my last post covering these banks on May 2, Bull Market Will End Without Big-Bank Leadership the only buy rated name was Citigroup. Even so, there was enough technical momentum to power the banking index to a new multi-year high at $62.92 on May 30.

At the beginning of the year the strong buy rated banks were projected to gain between 12.2% and 14.4% over the next 12 months. At Monday's close the banking index was up more than 20% year to date. Today the projected 12 month gains are 4.5% and lower, which is a sign that profits should be taken.

The daily chart for the banking index ($61.00) shifts to negative given a close below its 21-day simple moving average at $60.37 with risk to the 50-day SMA at $57.78. A reversion to the mean is the 200-day SMA at $52.95. My monthly value level is $60.11 with weekly and semiannual risky levels at $62.26 and $62.66.

Chart Courtesy of Thomson/Reuters

The finance sector is 16.8% overvalued with the banking index up 18.9% leading the S&P 500, which is up 14.4%. The overall market remains under a ValuEngine valuation warning with 69.2% of all stocks overvalued.

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